​LLC Exit Strategy Considerations
There are actually quite a few LLC exit strategy considerations that managing members of an LLC should be aware of while they are running and growing their business. The ability to “exit” the business by selling it is a valuable. It is an asset that the partners can sell. I have seen on occasion that a business simply closes up and the owners retire when they could have sold the business which would have added to their retirement savings.

​This article will examine the not only the different exit strategies there are but what considerations should go into each and why some may be better than others.

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What’s Better, An Asset Sale or a Sale of the LLC Entity?

​This simply means you selling all the assets of the LLC, but not the LLC entity itself. Some buyers do not like to buy the LLC entity and just want the assets of the LLC. They usually like to purchase just the assets because if they buy the LLC there may be hidden liabilities such as employee claims, unpaid vendors, personal liability claims or other skeletons in the closet that sudden appear from no where after the closing. It is more beneficial to the managing members to sell the LLC entity for tax reasons as we will explain in the next section. In the sale of a partnership or LLC with more than one member, each partner or member’s ownership interest that has been held for more than one year is treated as a capital asset and generally subject only to the long-term capital gains rate, typically 15%.

​What If My Buyer Won’t By My LLC?

​OK, so let’s say your buyer just wants your assets and doesn’t want to buy  the LLC. This often happens in Connecticut, New York, New Jersey and many other states. If the business assets are being sold for $1,000,000 then in Connecticut you pay approximately $393,000 in state and federal taxes on the sale of assets that are not capital gains.  On the other hand, if you can sell the buyer the LLC entity that owns the assets then you pay approximately $213,000 in total state and federal taxes. So that is a difference of $180,000. Based on those figures you could offer the buyer a deal and sell the business for $950,000 if they will agree to buy the LLC and not just the assets.
If the buyer refuses to buy the LLC because of fear of hidden liabilities then indemnity provisions can help protect against hidden or dormant liabilities.  Also talk to your attorney about what due diligence needs to be done to further protect you from possible liabilities that could pop up after the sale. It depends on the business of course. Different due diligence would be required if the LLC was running a small restaurant versus one that is running a construction company.

Selling to a Competitor

​Sometimes your competitor can be your friend. One of the ways businesses grow is by acquisition. What better way to grow than to buyout your competition? Your competitor now has just grown his or her business and at the same time knocked out one of his competitors, you. It is a good idea to always be cautious in entering into negotiations with a competitor and make sure your business contracts attorney prepares a strong confidentiality agreement to protect you in case your competitor is just fishing for information.

Joseph B. LaRocco is a business and corporate attorney that handles business contracts, business transactions, entity formations, and corporate governance.
​CLICK HERE TO CALL FOR A FREE CONSULTATION 475-244-5141

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Sale to  Larger Company

​Many larger companies also grow through acquisition. They find it easier, faster and less costly to buy an existing business. Why take the time, expense and risk of starting a new business when you can buy one if you have the cash. Don’t wait to start courting a buyer the year you are ready to sell. Put out feelers and develop relationships tow or three years before you are ready to sell. Waiting too long and not planning ahead is one of the main mistakes people make when selling their business.

​Sale By Some Managing Members to Retire

​If the LLC has several managing members it could be that some want to retire or some have health issue that force them to sell their interests. The operating agreement should spell our these retirement and poor health scenarios so the remaining members can either buy out the member or find a replacement member. There should be a procedure in place on how the LLC is valued so it is fair to everyone how that person is bought out of their interest.

The remaining members should have a right of first refusal so they can buy out that exiting member on a pro rata basis. This is probably the fairest way to handle things when one member wants to exit so that the remaining members can maintain their percentages in the LLC but it of course depends on the financial situation of the members. Language is sometimes included that the remaining members can pay a certain amount and then so much per month or per quarter for a few years to meet their payment obligation of buying out the exiting member.

Using a Business Broker to Sell Your LLC

​Business brokers usually have a data base and email list of  buyers. They may even have it broken down into category like technology, hospitality, construction and retail. Probably not your first choice to sell your business, but if you don’t have any ready buyers after putting out a number of feelers you should consider talking with a business broker to help make the sale. They can also help you with valuations and give you an idea if you are asking too little or too much for your business.

Contacting Your Vendors

​Vendors actually have their fingers on the pulse of business in your industry. They know your competitors. They even sometimes know about a business that is going to be sold before it even happens and before everyone else. Don’t be afraid to talk to your vendors to see if they know anyone who might be interested or who is looking around to purchase a business in your industry and location.

​Private Equity Group.

​Unless you business is more than just a small mom and pop store this will not apply, but it is worth mentioning. Private equity groups will look at business in a certain industry for a number of reasons. They may have a similar business they invested in and are looking for acquisitions in that industry to help their investment grow before going public. They may also look at your business as one of many in a fractured industry that they are looking to make several acquisitions in and use economies of scale to reduce costs and increase profitability.

​Is Going Public a Good Exit Strategy?

 This is not for the faint of heart and is a very big undertaking. It requires the right team that has had experience with public companies, most importantly the CFO position. Being a public company will create more demands on the management team and take away from sales and growth because now time has to be spent on public filings, press releases, making sure proper public disclosures have been given and getting audited financial statements done on schedule. The benefits are that depending on what industry you company is in and how profitable it is you can get a multiple on your price to earnings ratio. The relationship between the P/E ratio and stock price can be significant. This means your company as a public company is worth more than when it was a private company.

Summary of LLC Exit Strategy Considerations

  While all of the above are good LLC exit strategy considerations for you and your partners to take into account, there are many other factors for you to consider. Some of those factors will be based on whether or not you will need unanimous approval from your partners, the type of industry you are in, whether you have specific patents or intellectual property, and whether you are interested in a total payout at closing or will agree to be paid over a number of years.